MOSCOW, Jan. 1 - Russia cut off the natural gas intended for Ukraine on Sunday as talks over pricing and transit terms unraveled into a bald political conflict that carried consequences for Ukraine's recovering economy and possibly for gas supplies to Western Europe.

The dispute comes a year after the Orange Revolution brought a pro-Western government to power in Ukraine. It ends a decade of post-Soviet subsidies in the form of cheap energy that allowed Russia to retain some influence over the former Soviet republics.

Choking off the westbound pipes is a striking gamble by Russia, one likely to send political and economic ripples westward in the months ahead. Russia is positioning itself to become an energy-supplying nation capable of easing dependency on Middle Eastern oil in Western Europe and even in the United States.

Gazprom, the Russian energy giant, 51 percent of which is owned by the state, provides about a quarter of Western Europe's natural gas. Under a system begun in the Soviet era, 80 percent of Russia's exports to Europe have passed through Ukraine. Gazprom said it had reduced the flow to equal the volumes it agreed to provide to Western countries, minus what the company provides for the Ukrainian domestic market.

On the same day it throttled back its gas to Ukraine, Russia assumed the chairmanship of the Group of 8, the club for the world's large developed economies, promising to push the theme of "energy security."

Sunday's early-winter cut in gas supplies to Ukraine came as an unsettling reminder that promises of energy exports are not Russia's only method of using oil and gas to further its foreign policy goals - it can also turn off the valve of energy exports.

The election of Viktor A. Yushchenko as Ukraine's president last winter pulled the former Soviet country from Russia's sphere of influence. A gas shortage this winter could discredit him and weaken his party, with parliamentary elections coming up in March.

Tellingly, President Vladimir V. Putin of Russia was personally involved in the negotiations. It was he, rather than company officials, who made the final offer of a grace period on Saturday.

A jump in Russia's utility bill to Ukraine is at the heart of the current conflict. Russia is seeking to charge $220 to $230 per 1,000 cubic meters of natural gas, up from $50. Ukraine's economy has depended on buying cheap energy from Russia, which provides about a third of its natural gas supply.

The 11th-hour effort to head off the shutdown failed. On Sunday, Ukraine's natural gas distributing company, Naftogaz, said it had faxed a draft contract to Russia shortly after 11 p.m. Saturday - agreeing to terms laid out earlier that evening by Mr. Putin, the company said in a statement.

Mr. Putin had suggested a 3-month grace period if Ukraine would agree to pay the higher prices thereafter. Gazprom, however, said Sunday the faxed reply had fallen short of demands.

"We were prepared to come to terms with the Ukrainian people and help maintain comfortable conditions for them during the winter, the most crucial season from the point of view of energy supplies," Gazprom's chief spokesman, Sergei V. Kupriyanov, said on Russian television. "Our proposals were turned down."

At around 10 a.m. on Sunday, Gazprom began cutting the pressure on pipelines at the border with Ukraine, and the effect on the Ukrainian web of pipelines was felt later in the day.

"Russia counts on Ukraine to guarantee the stable supply of Russian gas to European countries in accordance with international obligations fixed in the European Energy Charter," a statement from the Interior Ministry said.

The effects were starting to be felt in Europe on Sunday night. The Hungarian natural gas wholesaler, MOL, said that deliveries from the affected pipeline were down more than 25 percent, according to Reuters, which added that in Poland, supplies dwindled 14 percent.

Polish officials said reserves were adequate for now, and the Hungarian company asked big gas consumers to switch to oil where possible.

Gazprom reduced the pressure in the gas mains leading to Ukraine at three metering stations and ceased boosting pressure in the westbound pipelines from a storage system that is designed to keep the pressure up during peak demand in the winter. It was unclear whether the impact on the other countries was a result of Gazprom's action or whether it was the result of interference by Ukraine.

"It's their task not to take the gas that goes through their territory," a Gazprom spokesman, Denis I. Ignatyev, said in a telephone interview.

Prime Minister Yury I. Yekhanurov of Ukraine said on Sunday that his country was not siphoning gas from the pipeline.

The State Department, expressing hope that the conflict would be resolved, said in a statement: "Such an abrupt step creates insecurity in the energy sector in the region and raises serious questions about the use of energy to exert political pressure. As we have told both Russia and Ukraine, we support a move toward market pricing for energy, but believe that such a change should be introduced over time rather than suddenly and unilaterally."

Mr. Putin has said that Russia's foreign policy will hinge on energy exports. In trips to Germany, Turkey and Japan last fall, he boldly promised not only a secure supply of fuel for the West, but also that Russia could become a much larger energy exporting nation in the years ahead.

He pushed Germany to endorse a multibillion-dollar underwater gas pipeline in the Baltic Sea. Gazprom is hoping to extend the pipe to Denmark, Belgium and Britain. Gazprom is also in talks with a short list of five major energy companies to develop a huge gas field in the Barents Sea, far above the Arctic Circle off western Russia, hoping to ship significant quantities of liquefied natural gas directly to the United States, the world's largest energy consumer.

Gazprom is the Russian government's largest energy policy instrument - though the company sometimes insists it operates only on business principles. The loss of fuel, if it persists, could shake Ukraine's economy the way the 1973 oil embargo helped plunge the United States into recession. Ukrainian officials said the loss could reverse its modest economic growth to cause a contraction of between 4 and 5 percent this year.

The dispute involves complex arguments by Gazprom, which says the price it wants to charge Ukraine is based on the prices of competing fuels, like diesel and bunker oil, on international exchanges. But not far below the surface, there is the embarrassing loss of a Kremlin-backed candidate in last winter's Orange Revolution.

Russia has increased the costs of its natural gas to other former Soviet states, though not as steeply. Belarus, a Russian ally, pays $47 per 1,000 cubic meters.

With its reduction in the flow of natural gas - from a rate of around 120 million cubic meters per day to around 96, according to Gazprom - Russia demonstrated there is only so far Ukraine can go before Russia reacts, and that indeed the country is still within Mr. Putin's range of influence. Each side blamed the other for the breakdown in talks.

"We will take all steps not to allow theft," the Russian Foreign Ministry said in a statement. "We get the impression that the Ukrainian government, feeling themselves uncertain, deliberately decided to break off the negotiation process."

In addition to a large pipeline - called "Brotherhood" for the supposed warm relations between the two Slavic republics in Soviet times - Russian gas enters Ukraine through more than 100 smaller pipes.

"There's a lot of posturing and a lot of ways to put pressure on Ukraine," said Leonid Y. Mirzoyan, an equity analyst at Dresdner Kleinwort Wasserstein, a financial company that has investment banking business with Gazprom.

In addition to the natural gas provided by Russia, Ukraine has domestic production and contracts for natural gas from the Central Asian country of Turkmenistan.

Naftogaz officials in Ukraine have said the Russian exports to Western Europe will not diminish. Yet government officials have also said the country will siphon gas from the export routes if necessary. Ukraine is a party to the European Energy Charter, an agreement intended to prevent disruption of fuel passing between countries.

Nonetheless, Mr. Ignatyev, the Gazprom spokesman, said Sunday evening that Gazprom had already detected some siphoning of gas by Ukraine, and that the company would reveal its evidence on Monday.

This crisis will probably cease soon. Ukrain needs this gas. Russia need to export it. and the rest of Europe need it to. particularly countries who didn't import a lot from other countries. Poland's stock is only for 1 week. UK's stock only for 14 days. France for 48, and Germany for 75.
Western Europe has other countries (like France : Algeria and North sea), but some eastern countries, or central countries, like Austria, would have more problem if Russia stop its exportations. There is already a pressure low in Austria.

This crisis will probably cease soon. Ukrain needs this gas. Russia need to export it. and the rest of Europe need it to. particularly countries who didn't import a lot from other countries. Poland's stock is only for 1 week. UK's stock only for 14 days. France for 48, and Germany for 75.
Western Europe has other countries (like France : Algeria and North sea), but some eastern countries, or central countries, like Austria, would have more problem if Russia stop its exportations. There is already a pressure low in Austria.

if regain means "take back", maybe.
Russia lost influence with the "Orange revolution", when Ioutchenko came at the power. Ukraine went near Europe, and took its distance with Russia. Russia is probably making pay Ukraine for this reason. Putin knows that 80 % of the gas for Europe go through Ukraine.

if regain means "take back", maybe.
Russia lost influence with the "Orange revolution", when Ioutchenko came at the power. Ukraine went near Europe, and took its distance with Russia. Russia is probably making pay Ukraine for this reason. Putin knows that 80 % of the gas for Europe go through Ukraine.

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So, if you were Ukrainian, what would you want your gov't to do? I mean the one you voted for and basically revolted for?

I would want that the government will find an issue to the crisis, becasue without gas, it's hard...particularly during winter. But Ukraine shouldn't have to pay to much for the gas too....so, 2 interest in contradiction : preservation of the gas for Ukraine, and avoid to pay a lot for it.

I would want that the government will find an issue to the crisis, becasue without gas, it's hard...particularly during winter. But Ukraine shouldn't have to pay to much for the gas too....so, 2 interest in contradiction : preservation of the gas for Ukraine, and avoid to pay a lot for it.

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If they hold out, find another producer, even more expensive, they will win. If they give in, they will have paid ransom and never be safe from the Bear again.

Something Old, Something New
From the desk of George Adair on Mon, 2006-01-02 10:17

If you hang around long enough, the wayback machine coughs up this one from the Financial Times, circa 13 January 1982:

SECTION I; Pg. 14
HEADLINE: Study of sanctions impact on pipeline
BYLINE: By David Tonge in London

WESTERN officials are to meet in Washington later this week to discuss the precise implications of U.S. sanctions against the Soviet Union on the construction of the 5,500km Siberia-West Europe gas pipeline.

West Europeans believe the U.S. will not use the recent developments in Poland [in December 1981 the Communist regime in Poland declared a state of war and outlawed Solidarity, whereupon the West introduced economic sanctions against Poland and the Soviet Union] to prevent the pipeline going ahead, according to diplomats who attended Mondays meeting of Nato Foreign Ministers in Brussels. Herr Helmut Schmidt, the West German Chancellor, apparently ended his recent visit to Washington convinced of this.

The Reagan Administration has long argued that the pipeline will make West Europe dangerously dependent on the Soviet Union. EEC countries say it would be very wrong for the U.S. to use the present situation to destroy the pipeline.

Lord Carrington, British Foreign Secretary, has compared the importance of the pipeline to Europeans with the effect on U.S. farmers of banning grain sales to the Soviet Union.

General Electric and Caterpillar have been the major U.S. corporate casualties of the sanctions, but yesterday there were some indications that the U.S. position on sanctions may be less absolute than initially indicated.

Western countries are still confused about the precise effects the sanctions will have on some U.S. concerns and what action by non-U.S. companies would be considered to undermine the American sanctions.

In Scotland, John Brown Engineering is known to be able to complete six of the 21 gas turbines ordered by the Soviet Union despite the halting of supply of rotors, blades and nozzles from General Electric.

Western countries hope to be able to announce a composite package of sanctions against Poland and the Soviet Union within a month. Officials will meet next week in Brussels to discuss the package.

KGB Tightens Screws on Ukraine
From the desk of Paul Belien on Sun, 2006-01-01 18:39
ukraine-massacre.jpg

In the 1930s Russia robbed Ukraine of its food supplies. The Kremlin deliberately created a food shortage. Ukrainian grain was collected and stored in grain elevators that were guarded by the Soviet army and secret police units (the NKVD, the predecessor of the KGB) while Ukrainians were starving in the immediate area. The result of the man-made famine of 1932-33 was the death of 7 million people. The famine was instigated by the Russians to break the spirit of the Ukrainians and force them into collectivisation and submission to Moscow. Let us do it again, Vladimir Putin, a former officer of the KGB, the Soviet Gestapo, and a worthy successor to Josef Stalin, said today.

The criminals who ruled Russia under the Soviet regime, and who bankrupted not only their own country but the whole of Eastern Europe, are still in charge in Moscow. Today, Russias state-run gas company Gazprom has cut gas supplies to Ukraine. The cut is the result of Russias unilateral decision to raise the gas price for Ukraine from 50$ to 230$ per 1,000 cubic metres of gas. Ukraine, still recovering from 70 years of Soviet occupation, is unable to pay this price and proposed a compromise of 110$, but Moscow wants to punish Ukraine because its politicians are not submissive enough to the Kremlin. Gazprom charges the Moscow-friendly dictatorship in Belarus (another country run by a former KGB agent) only 47$ per 1,000 cubic metres of gas. Armenia and Georgia are charged 110$, Romania 280$ and the EU on average 240$. According to the Kremlin, nations that want to be free have to pay the price of the free nations.

Last week Andrei Illarionov resigned as Mr Putins economic advisor. Mr Illarionov, who never collaborated with the former Communist regime, is an honest man. He accused the Kremlin of using gas as a weapon. Last week Ukraine, which depends heavily on Russian gas, tried to find a new gas supplier and approached Turkmenistan. Unfortunately, Turkmenistan is also run by former KGB criminals. Gazprom thwarted the Ukrainian plan by buying Turkmen gas stocks itself, at a price of... 65$ per 1,000 cubic metres.

Ukraine is dependent on Russia for 30% of its gas supplies. Western Europe, however, is dependent for the gas that it buys in Russia on pipelines running through Ukraine. Consequently Gazprom cannot simply cut all supplies to Ukraine. It has reduced the supplies to the pipeline by 15%, which is the percentage of the total volume that is used by Ukraine. If it wants to do so Kiev can tap into the Russian supplies to the West in order to secure its own gas supplies. The Russians have warned the Ukrainians that if they do so, they will be considered to be thieves. Western Europe is concerned, too.

Some EU countries rely heavily on Russian gas. Germany, for example, gets about 30% of its gas supplies from Russia, which makes it as dependent on Russian gas as Ukraine. If Kiev uses the gas for its own needs, to prevent Ukrainians freezing to death through Putins actions as they starved to death through the actions of his predecessor Stalin eight decades ago, it is Germany that will be left in the cold. On Wednesday EU gas industry experts will meet in Brussels to discuss the crisis.

It is easy to see what would have happened today if the gas pipeline that the Russians and Germans are planning to build on the Baltic seabed had already been completed. This pipeline, which is to be ready by 2010, will enable the Russians to deliver gas directly to Germany, bypassing all countries in between. It will allow Mr Putin to reassert Russian dominance over the whole of Eastern and Central Europe. It is time that the West sees Putin for what he really is: the new Stalin. If the Baltic pipeline gets built it will mean the end of freedom and democracy in Eastern Europe. Again the West, as it did earlier in Yalta, will have sold out the East to the Russian bear.

Today, January 1, 2006, Russia also takes over the chairmanship of the G8 group of industrial nations for the first time in history. This provides Mr Putin, the executioner of Ukraine, with an opportunity to emphasise Russias role in international affairs. Though the Russian economy is peanuts compared to those of the US, Canada, Japan, Germany, France, Britain and Italy, it has been admitted into the club of developed democracies because Russia has enough oil and gas to keep Western Europe supplied for years to come. Some US Senators have argued that Russia should not have been allowed in as a member. What is happening today shows that they are right.

If the Ukrain is a major point of transport, seems like a lose-lose scenario for all. Pretty testy situation.

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Ukraine can siphon off gas if it is forced to, but Russia cannot afford to play this game for long, they need the $$$ too much. Best thing US/EU could do, back Ukraine and find other sources, then Ukraine could demand removal of Russian pipes or they will confiscate them.

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